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allocative efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
Competitive market
a market that has many buyers and sellers
Demand schedule
shows how much of a good or service consumers will want to buy at different prices
Quantity demanded
actual amount of a good or service consumers are willing to buy at some specific price
Demand curve
graphical representation of the demand schedule. It shows the relationship between quantity demanded and price
Law of demand
says that a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service
Shift of the demand curve
change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position denoted by a new demand curve
Determinants of Demand
Factors other than price that determine the quantities demanded of a good or service: Taste and Preferences, changes in Income, prices of related goods, Expectations of a price change, # of buyers
Substitutes
rise in the price of one good leads to an increase in the demand for the other good
complementary goods
Goods that are commonly used with other goods - a rise in the price of one good leads to a decrease in the demand for the other good
Normal good
rise in income increases the demand for a good- the normal case
Inferior good
rise in income decreases the demand for the good
Quantity supplied
actual amount of good or service producers are willing to sell at some specific price
Supply schedule
shows how much of a good or service producers will supply at different prices
Supply curve
shows the relationship between quantity supplied and price
Determinants of Supply
Factors other than price that determine the quantities supplied of a good or service: technology, International events/natural disasters, Gov't policies (tax- less, subsidy- more), Cost of resources, number of sellers
Excise tax
tax on the sale of a good or service
Subsidy
money from the government to help a producer continue to operate
market equilibrium
quantity demanded by buyers equals the quantity supplied by sellers, where supply and demand curves meet
equilibrium price
price at equilibrium
Equilibrium quantity
quantity at equilibrium
Market Disequilibrium
A condition where the market is not at equilibrium
Surplus
excess supply when the price is above the equilibrium price Qs>Qd
Shortage
excess demand, price is below equilibrium price Qd> Qs
Individual consumer surplus
the net gain to an individual buyer from the purchase of a good. It is equal to the difference between the buyers willingness to pay and the price paid
Total consumer surplus
sum of individual consumer surpluses of all the buyers of a good in a market. Total consumer surplus is equal to the area below the demand curve but above the price
Consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Individual producer surplus
net gain an individual seller gets from selling a good, it is the difference between the price received and sellers cost
Total producer surplus
market sum of individual producer surpluses of all sellers of a good in the market
Producer surplus
individual and producer surplus
Utility
a measure of the satisfaction the consumer derives from consumption of goods and services
Marginal utility
changed in the total utility generated by consuming one additional unit of that good or service
law of diminishing marginal utility
the rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased
Budget constraint
requires that the cost of a consumer's consumption bundle be no more than the consumers income
utility maximizing rule
The principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility. MUx/Px = MUy/Py
Price ceiling
a maximum price sellers are allowed to charge for a good or service
Price floor
a minimum price buyers are required to pay for a good or service
Deadweight loss
Loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity
Black market
a market in which goods or services are bought and sold illegally- either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling - illegal subletting
Quotas
The upper limit on the quantity of some good that can be sold in a foreign country. The total amount of the good that can be legally transacted- quota limit- only people with licenses can sell the good- foreign currency purchases, fish catches, to avoid undesirable outcomes
Elasticity
How much consumers/producers respond to changes in price
Elasticity of demand
the ratio of the percent change in the quantity demanded to the percent change in price as we move along the demand curve. Elasticity of demand= % change in Qd/ % change in price
Perfectly inelastic
when the Quantity demanded (Qd) does not respond at all to changes in the price. The demand curve is a vertical line, and the elasticity of demand is equal to zero.
Perfectly elastic
when any price increase will cause the quantity demanded to drop to zero, the demand curve is a horizontal line, and the elasticity of demand is equal to infinity
Elastic
elasticity of demand is greater than one, and this means that consumers are very responsive to a change in price and will definitely change their buying behavior
Total revenue
the total value of sales of a good or service. It is equal to the price multiplied by the quantity sold
Price effect
after a price increase of a good, each unit sold sells at a higher price, which tends to raise revenue
Quantity effect
after a price increase of a good, fewer units are sold, which tends to lower revenue
Factors that affect elasticity of demand
amount of available substitutes, necessity vs. luxury, share of income spent, time needed to adjust to a price change
Cross-Price Elasticity of Demand
Looks at two goods and measures the effect of the change in one good's price on the quantity demanded of the other good.
Cross-price elasticity of demand= % change in quantity of A demanded/ % change in price of B
Income elasticity of Demand
measures the how the change in the demand for a good is affected by a change in someone's income Income elasticity of demand= % change in quantity demanded/ % change in income
Income elastic
when income rises, the demand rises faster than income- income elasticity of demand is greater than 1 (luxury goods like travel and second homes)
Income inelastic
when income rises, the demand for the good rises, but slower than income- the income elasticity of demand is less than 1 (necessities like food and clothing)
Economic agents
Consumers, Producers, and Governments. Economic decision-makers
demand
Consumer willingness and ability to buy products
Consumer Choice Theory
The theory relating consumer demand curves to consumer preferences.
Market Demand
the demand by all the consumers of a given good or service
Substitution Effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods
Income Effect
the change in consumption/purchasing power resulting from a change in real income
profit
total revenue minus total cost
supply
The quantity of something that producers have available for sale
Law of Supply
producers offer more of a good as its price increases and less as its price falls
marginal cost
the cost of producing one more unit of a good
Tariff
A tax on imported goods
market supply curve
a graph of the quantity supplied of a good by all suppliers at different prices
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
Unit Elastic
when the percentage change in price and quantity demanded are the same
price elasticity of supply
a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price
Superior/luxury good
Goods that make up a larger share of consumption as income rises
Might not be consumed at all below a certain income level
perfect competition
the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
producer surplus
The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.
subsidy
A government payment that supports a business or market
productive efficiency
The production of a good in the least costly way
Protectionism
Economic policy of shielding an economy from imports.
price floor
A legal minimum on the price at which a good can be sold. Must be set above the market equilibrium price
